Luxury brands still see Chinese millennial shoppers as a powerful group of consumers. After all, they are the demographic that most contributed to global luxury growth in 2017, as reported by Bain & Co. However, a new report from the Chinese research agency Yaok Institute, published on January 14th, questions whether the millennial market in China is a sustainable revenue source for luxury brands.
Defined as those born between 1982 and 1997, millennials have been billed “marginal consumers” by the report, meaning that they’re part of the Chinese middle class and may only make one or two luxury purchases a year. As China’s economic development accelerates and millennials continue to mature, the Chinese middle class has split into two groups: a smaller group of affluent consumers that continue to purchase an abundance of luxury items and the rest — a group that has downgraded their consumption to “marginal consumer” status.
The luxury market’s core consumers, who treat luxury goods like necessities, each own assets worth over $1.5 million (RMB 10 million), and, according to the research, there are about 4 million of them that account for a whopping 60 percent of luxury consumption.
In recent years, as luxury brands have had to face the reality of losing some core consumers, they’ve begun to seek different ways to lure “marginal consumers” into buying more luxury products, such as diversifying product lines, launching more lower-priced goods, and inventing new ways to discount products. But unfortunately, the report cited that for every three marginal consumers a brand attracts, they risk losing one core consumer because of their tactics trying to lure marginal consumers. So in the end, they gained more consumers, but not more sales.
The report argued that Chinese millennial consumers are mostly marginal consumers. They’re the fastest growing demographic in China, they aren’t afraid to spend in advance, and they’re often early adopters of new trends, but there are many reasons why luxury brands can’t rely on them for future growth:
- Most millennials are still relying on their parents for financial support, so they don’t hold much power to generate sales on their own.
- Millennials often face debt problems. Almost every single one holds some form of small debt.
- They face the pressures of home and car ownership, as well as the educational spending for their children.
- Most millennials are working class, so they might be at risk of losing their jobs due to the further development of the internet and artificial intelligence.
- Millennials like to consume but aren’t good at financial management. They rarely save, and when they do, their deposits are quite small.
- Millennials are early adopters of new trends but lack brand loyalty.
- They love consuming luxury but are still looking for bargains.
The report suggested that, because of the differences between core and marginal consumers, luxury brands have slowly diverged into two types of brand positioning. One continues to maintain the exclusive profile of luxury goods aimed at a small number of VIPs, while the other becomes a high-end brand marketed to a wide audience. Each position has its advantage and disadvantages. Truly high-end positioning may have less competition but offers a smaller market, whereas appealing to mass consumers caters to a bigger population base but guarantees your brand a lot more competition with different kinds of brands.
As a result of these observations, the report advises brands in China to continue to focus on a consistent brand image. It concludes that retailers shouldn’t necessarily be optimistic in the long-term about millennials and their contributions to luxury sales. While Chinese millennials may be spending more freely now, China’s slowing economic growth — combined and rising living costs in the country — could have a detrimental effect on spending and might force millennials to focus on saving in the future rather than spending.